Kick ‘Em When They’re Down Silicon Valley’s Usual CEO Excuses Don’t Tell the Real Story
Hal Plotkin, Special to SF Gate
Thursday, August 23, 2001
You might think we’ve heard enough about what’s gone wrong in our tattered high-tech economy. After all, hardly a day goes by without fresh reports of corporate bankruptcies, more layoffs or continued erosion in the earnings of local tech firms.
What’s usually missing from most media coverage, though, are credible explanations about the underlying causes of the tech meltdown. Instead, far too much credence is being given to the CEOs running tech firms who’ve managed to convince much of the public, including many business reporters, that they have had little or nothing to do with the failures their firms are experiencing.
Take, for example, the usually unexamined canard that “inventory corrections” are the main culprit behind the tech sector’s precipitous slide. Portraying unsold inventories as the cause of the problem is like saying a team lost a ball game because it had the lower score. It tells you nothing about why things turned out that way.
Nonetheless, dozens of high-tech CEOs at firms as diverse as Cisco Systems, Motorola and Intel have successfully ducked responsibility in recent months by casting blame on that inventory correction we’ve been hearing so much about. Similarly, other CEOs have been pointing the finger at what they claim is just a temporary “cyclical” or “seasonal” setback. Boiled down, what most of these CEOs are really saying is that outside forces are to blame and that the situation will remedy itself over time, just as spring follows winter.
This seemingly benign, upbeat attitude may be the single biggest danger now facing the tech sector. Why? Because it threatens to mask the contribution poor management practices and outright executive incompetence have played in creating the current slump. Even worse, it delays putting in place the effective countermeasures needed to turn the situation around.
As Shakespeare put it, “The fault, dear Brutus, is not in our stars, but in ourselves.”
What led many high-tech firms into the ditch over the past year was often outlandish executive behavior. If we really want to understand what’s gone wrong, these are the rocks we must look under.
To be sure, no one likes to offend the leaders of major tech firms, particularly in the shrinking advertising-dependent tech and business-news media. But given the scope of the current slump, the need to get tough on the bosses must outweigh the desire to play nice.
Take salaries, for example.
The morale-killing pay gap between CEOs and workers is now the widest it has been in all of recorded commercial history. Top-heavy salaries in the tech sector have squandered enormous financial resources.
The average annual pay package for Silicon Valley’s top 150 executives mushroomed to $5.9 million last year, nearly double what it was one year earlier, according to a recent survey by the San Jose Mercury News. In contrast, the typical manufacturing worker earned $44,680 last year, according to New York-based research firm Towers Perrin.
The rationale for sky-high tech CEO salaries, options and bonuses, of course, was that these supposedly talented leaders were driving their companies to new heights and creating shareholder value along the way. Now that the bottom has fallen out, however, it’s pretty clear that many if not most of these corporate leaders were rewarded simply for being there, much like a lucky surfer catching a big wave.
The real reason the members of Silicon Valley’s higher echelon paid themselves so handsomely over the past few years is now abundantly clear, and it had nothing to do with their performance. They ran off with the money because they could — and because no one stopped them. What’s worse, there are no indications this trend is about to come to an end, because CEO compensation continues to rise even while corporate performances decline.
Many of the CEOs leading Silicon Valley’s worst-performing companies took home much more than $5.9 million last year. Cisco Systems CEO John T. Chambers, for example, banked $157.3 million during a period when the team he supervised miscalculated demand for Cisco’s products by an astonishing $2.25 billion. That’s more than half the company’s total sales for the fourth quarter of last year. You can bet a Cisco accountant would have been harshly disciplined, if not fired on the spot, had she made an error one-millionth that size.
Stories of incompetence, malfeasance and featherbedding by Silicon Valley executives are almost too numerous to recount. For example, I know of a once highly promising local firm where an outrageously paid CEO’s six-month tenure did not include a single visit with a customer. Instead, the exec’s secretary told me in confidence that her duties consisted mostly of arranging golf dates with the CEO’s friends and booking his restaurant reservations and frequent vacation jaunts.
Likewise, it’s an open secret in Silicon Valley that top jobs are often handed out based on connections to a firm’s key investors rather than talent or ability, similar to the way some unscrupulous Broadway producers have been known to solicit starring roles for their tone-deaf mistresses. The Sequoia Capital Web site, for example, only recently removed language that explained why venture capitalists at that firm prefer to do business with people they already know. Perhaps if Sequoia had brought in a few more outsiders with different perspectives, it might have avoided the groupthink that has so decimated its portfolio of companies.
Meanwhile, does Hewlett-Packard CEO Carly Fiorina really need to be squired around in a private jet? The company would be better off if she simply strolled across the street to the local Fry’s electronics store. If she did, she’d discover that HP printers are so ineptly displayed as to make their purchase virtually impossible.
And what was the board of Webvan thinking — and who made the decision? — when it agreed to pay CEO George Shaheen (or his wife, if she outlived him) $375,000 for life regardless of how the company fared?
Reforming counterproductive business practices like these is the indispensable next part of the business cycle that many observers have overlooked. And this cycle does not happen automatically, as the seasonal apologists maintain. Instead, it’s part of a natural process that occurs only when business leaders are forced to face up to what went wrong, figure out why it happened and make the necessary corrections.
But that won’t happen as quickly as it could if so much of the business press continues to drop the ball by taking CEO excuses as gospel. Ignoring the real problems virtually guarantees their continuance.
The last time something like this happened, you might recall, was during the 1980s and early ’90s, when the news media was filled with countless breathless reports of a mostly nonexistent “economic recovery.”
I was a cub reporter for California Business magazine at the time. Our state’s economy was in a virtual free-fall. California’s vacant lots were just beginning to fill with the homeless encampments that have since become a permanent urban fixture.
Chiding the news media for what he claimed was its role in worsening the situation, then-President Ronald Reagan went on TV and famously held up a copy of the Chicago Tribune’s voluminous help-wanted pages. Pointing to the ads, Reagan claimed that sufficient numbers of good jobs were readily available. And to be sure, the Trib was thick with classified recruitment ads, many of them splashy full-pagers.
It turned out, however, that many large businesses were placing help-wanted ads merely to give the impression their companies were doing well. It was a way to keep their stock prices up. A subsequent congressional investigation of tech firms with government contracts led to millions of dollars in fines and penalties and the creation of tighter regulations aimed at preventing companies from using federal money to advertise phony job vacancies. But in the meantime, many reporters bought in to the notion that the downturn was not really all that serious, which helped forestall the effective remedies that were finally put in place years later.
Like then, too much of the tech and business media is buying into the Ethel Merman economy, this time by letting the CEOs portray the tech sector as a place where everything will be coming up roses if we just stay the course and wait it out.
Personally, though, I won’t be convinced things are really starting to turn around until someone successfully explains how an executive can make a $2.25 billion error and still be running the show.
This work is licensed under a Creative Commons Attribution 4.0 International License.